1. Partner’s Self-Employment Income Creates Cash and Forgiveness

Just as sole proprietors failed originally to ask for their PPP cash assistance, so did many partners.

Three things to note here:

1. The partnership (not the individual partner) applies for the PPP loan.
2. The deemed payroll amount that the partnership uses for the partners is their 2019 self-employment income (both guaranteed payments and ordinary income).
3. If the partnership filed for the PPP loan based on its employees, but failed to include any dollar amount for the partners, the U.S. Small Business Administration (SBA) in an interim final rule authorizes the lender to increase the loan amount for the appropriate partners’ deemed payroll inclusion that was left out of the original application.

2. Paid and Capped

Line 9 of the SBA official forgiveness application reads as below:

Line 9: Enter any amounts paid to owners (owner-employees, a self-employed individual, or general partners). This amount is capped at $15,385 (the eight-week equivalent of $100,000 per year) for each individual or the eight-week equivalent of their applicable compensation in 2019, whichever is lower.

Note the word “paid.”

In general, payments to partners don’t occur in a pattern that would equal the amount needed during the eight-week covered period.

To protect the partnership’s forgiveness amount, make sure that payments to partners during the eight-week covered period equal the 8/52 of the partners’ deemed 2019 payroll. We have not seen a requirement on the “paid” part, but that word is there. So protect yourself.

3. Qualifying Non-Payroll Expenses

When explaining that the partnership had to file for the PPP loan and forgiveness, the SBA stated:

Rent, mortgage interest, utilities, and other debt service are generally incurred at the partnership level, not partner level, so it is most natural to provide the funds for these expenses to the partnership, not individual partners.

4. Apply

If your partnership has not applied for its PPP money, do it now. The SBA has plenty of money available for PPP loans at the moment, but you have to think it won’t last long.

5. Easier Forgiveness on the Way

On Thursday, May 28, the U.S. House of Representatives approved the Paycheck Protection Program Flexibility Act of 2020 by a vote of 417-1. This bill or something similar will be enacted in June to make it easier for all PPP borrowers to qualify for PPP loan forgiveness.

Here are some highlights from this bill:

• Extends the eight weeks to 24 weeks
• Changes the 75 percent rule to 60 percent
• Changes the two years to five years and retains the 1 percent interest rate
• Changes June 30 to December 31
• Adds exemptions that will increase full-time equivalents and that will increase forgiveness amounts

Will make it easier to obtain forgiveness when you have reductions in your employee

If you need our assistance with either the PPP loan or forgiveness, we are here to be of service. Our office e-mail is info@flextcg.com and the office number is 415-860-6288 (San Francisco), 917-397-0949 (New York) and 713-396-0107 (Houston).

The post Six Insights into the PPP for Partnerships appeared first on Flex Tax and Consulting Group (FTCG).

If your small businesses managed to secure a Paycheck Protection Program (PPP) loan before the well ran dry, your next task is figuring out how to use it. Here’s a list of the expenses that qualify for forgiveness (meaning you don’t have to pay the loan back).

Remember, your lender will perform an audit at the end of the 8-week forgiveness period to see how you spent the loan. Keep the relevant paperwork under each section so you can sail through the audit.

Salaries & Wages

A minimum of 75% of your PPP loan must go to compensating your employees, excluding those who earn more than $100,000 per year. We are still waiting for guidance from the Small Business Administration on salaries over $100,000 and business owner/family salaries.

For the audit: Payroll processing reports, tax reports, or other reports such as paid time off (vacation or sick leave).

Healthcare Benefits

This is for paying any company’s group health insurance plan premiums. Company owners and family are included if they’re on the group plan. However, payments to the owner’s policy or Health Savings Account contributions do not qualify for PPP loan forgiveness.

For the audit: Insurance invoice(s) and proof of payment.

Retirement Plan Contributions

If you offer your employees a Defined Benefit Plan, Defined Contribution Plan, or SEP IRA, you can use some of your PPP loans to continue funding that plan. There’s no specific guidance about benefits paid to the owner or owner’s family, but we doubt it would be forgiven.

For the audit: Retirement plan statements, funding schedules, and proof of remittances.

Non-Payroll Expenses

Operating expenses that don’t directly benefit employees — a few of which we’ll list below — can’t total more than 25% of the loan. You’ll have to pay back any excess amounts if you go over that percentage.

Rent

The expense must be incurred and paid during the 8-week loan period to be forgiven. Any rent that was already due before the date of the loan doesn’t qualify. Also, the lease must have been signed before February 15, 2020.

For the audit: Signed lease contract, proof of rent payment (canceled check, ACH, bank statement, or wire).

Utilities

Service contract agreements must have been in effect before February 15, 2020. This covers electricity, gas, water, phone, internet, etc. It’s not clear what the SBA means by “etc.”

For the audit: Proof of payment for each utility.

Interest in Business Loans

You may use some of your PPP loans to pay the interest on your business mortgage, practice acquisition loan, build-out loan, or any loan secured by business personal property. The mortgage/loan must have been in effect before February 15, 2020.

For the audit: Bank statement or loan invoice showing principal and interest, plus proof of payment. You may wish to pay principal and interest separately during the 8-week PPP loan period, so there’s no question in the auditor’s mind.

The pandemic has inflicted significant damage on many of America’s small businesses. And the financial relief red tape makes the situation even more difficult. Flex Tax can help make sense of it all and take some of the bookkeeping worries off your shoulders, so you can focus on returning to the “new normal.”

The post What Can You Spend Your PPP Forgivable Loan on? appeared first on Flex Tax and Consulting Group (FTCG).

As LLCs increase in popularity, CPAs confronted with complex tax issues, particularly when ownership of the LLC changes. The IRS issued revenue rulings 99-5 and 99-6 to address issues surrounding the conversion of a single-member LLC to a multiple-member LLC and the conversion of a multiple-member LLC to a single owner entity. This article explains the rulings and discusses proper accounting procedures for the transactions they highlight. Also, it supplements the examples in the rulings and offers some useful planning tips for CPAs.

EXECUTIVE SUMMARY

• THE IRS ISSUED REVENUE RULINGS 99-5 AND 99-6 to address issues related to the conversion of single-member LLCs to multi-member LLCs and the conversion of multi-member LLCs to a single-owner entity.
• REVENUE RULING 99-5 PROVIDES CPAs WITH GUIDANCE on proper accounting when a single-member LLC converts to a multi-member LLC. The ruling examines the transaction from two perspectives: the sole owner sells a half interest to someone else or the new owner contributes property in exchange for a half interest.
• THE BEST METHOD FOR BRINGING A NEW OWNER into the business depends on the selling owner’s intent. If the seller wants to increase his or her personal cash flow, selling a half interest may be the best approach. If the seller wants a capital infusion for the business, allowing someone to contribute property in exchange for a half interest will be preferable.
• REVENUE RULING 99-6 DEALS WITH INSTANCES WHEN a multi-owner LLC is converted to a single-owner entity. The ruling covers the transaction from two approaches: one LLC member sells his or her full interest to another member or all LLC members sells their full interests to a nonmember.
• THE BEST OPTION UNDER REVENUE RULING 99-6 ALSO depends on the seller’s motivation. Owners will often use the first approach when they have a contractual agreement to sell their interests to each other, such as in the event of death, divorce or retirement. The second approach is best when all owners want to leave the business.

SINGLE-MEMBER TO MULTI-MEMBER LLC

Revenue ruling 99-5 provides guidance on proper accounting procedures when a single-member LLC converts to a multiple-member LLC. The ruling addresses the conversion issue from two perspectives:

• A sole member sells a half interest to another person.
• The new member contributes property, including cash, to the LLC in exchange for a half interest instead of buying part of an existing member’s ownership interest.

Planning Tips  

• Carefully identify and track assets with multiple holding periods along with the holding periods of other

assets.

• Keep in mind that when advising clients on LLC conversions, the process generally has two distinct phases: (1) the type of conversion to undertake and its consequences and (2) post-conversion transactions when the LLC or its members may sell assets acquired during the conversion.
• When recommending a preferred method of LLC conversion to clients, remember that the member’s intent or preexisting membership agreements may determine the conversion method.
• Develop a clear understanding of LLC conversion methods—and the resulting tax consequences for all parties—because over time a CPA may represent a different party in each conversion.
• Remember that conversion may invoke the three-tier basis allocation process outlined in IRC section 732.

MULTI-MEMBER TO SINGLE-MEMBER LLC

Revenue ruling 99-6 provides guidance when a multiple-member LLC is converted to a single-owner entity for tax purposes. The ruling also addresses the conversion issue from two perspectives.

• One LLC member sells his or her full ownership interest to another member, making the transferee the sole owner.
• LLC members sell their full ownership interests to a nonmember.

THE PREFERRED BUSINESS ENTITY

The importance of revenue rulings 99-5 and 99-6 will increase as the LLC continues to become America’s preferred business entity. While the LLC offers many tax and nontax advantages, it also offers a great disadvantage: The application of subchapter K and its myriad intricate partnership taxation rules and procedures. Unfortunately, as LLCs become more prevalent, CPAs and their clients will encounter complex partnership issues, such as those in revenue rulings 99-5 and 99-6, more frequently. Proper planning requires a strong understanding of the technical interplay between the sellers’ desire and the various partnership provisions in the IRC. The inability to resolve issues such as split holding periods, gain or loss recognition and basis will leave some taxpayers with undesirable present and future tax consequences.

Flex Tax and Consulting Group, is a comprehensive fee-based service that will help site visitors form an LLC in.the U.S. The site includes free access to a wealth of information, including a glossary of terms, the answers to frequently asked LLC questions and detailed state-by-state incorporation procedures.

The post Accounting for LLCs Conversions appeared first on Flex Tax and Consulting Group (FTCG).

If you are thinking of starting a company, then one of the best steps you can take is to understand the structure options you have before you start your own business. Today we are going to introduce the options you have and how to handle the taxes with those structures.

Small Business Taxes Depend on Business Structure

These are the basics of paying your small business taxes:

What types of taxes do you need to pay?
How much do you have to pay in taxes?
When do you have to pay small business taxes?
And how do you pay small business taxes?

When it comes down to it, these four basics depend on your business’s legal structure. Whatever your business entity is, you’ll first need to know how it affects your tax burden.

Small Business Taxes for Sole Proprietors

A sole proprietorship is a business that’s owned and operated by one individual. Because the owner of a sole proprietorship is flying solo, filing taxes under this business structure is relatively simple.

Instead of filing your small business taxes on behalf of the business, as a sole proprietor, you’ll report business income and losses on your income tax return. Business profits will tax at your income tax rate. Sole proprietors must also pay self-employment taxes, which cover the business owner’s medicare and social security obligations.

If you run a sole proprietorship, you’re generally required to file a Schedule C or a Schedule C-EZ with your Form 1040 and pay quarterly estimated taxes.

Estimated tax is the method that all businesses use to pay social security and medicare taxes along with income tax. If you were an employee, you wouldn’t worry about this—your employer would withhold these taxes for you. But as a sole proprietor, you are responsible for making quarterly payments with the estimated tax method.

To figure out what you’ll need to pay in self-employment taxes—and if you have to pay quarterly—use Form 1040-ES, Estimated Tax for Individuals.

Small Business Taxes for Partnerships

Partnerships are businesses operated by two or more owners. Most partnerships are known as general partnerships, but there can also be limited partnerships or limited liability partnerships. Business owners who are a part of the partnership must pay income taxes, self-employment taxes, and quarterly estimated taxes.

If you operate a partnership, the business has to file Form 1065, which is an annual information return that shows the income, deductions, gains, and losses from the business’s operations—but the business itself doesn’t pay any income tax. Partnerships enjoy what’s called “pass-through taxation,” meaning the income is taxed on the owners of the business instead of being subject to corporate tax rates.

To file taxes, owners who are included in the partnership have to file their respective share of the business’s income and losses on their tax returns. Each partner’s share of the business’s income and losses are shown on Schedule K-1.

Small Business Taxes for C-Corporations

If your small business is structured as a C-corporation, your business is legally separate from you as the owner. C-corporations are subject to what’s called “double taxation.” To start, C-corporations are subject to a flat income tax rate of 21%. Then, shareholders are taxed on their tax returns when profits are distributed as dividends. The primary income tax form for C-corporations is Form 1120.

Shareholders who actively participate in the work of the corporation are considered employees. Only the employee’s salary is subject to self-employment taxes. Dividends are subject to a different dividend tax rate. Many corporations save on self-employment taxes by paying themselves a smaller salary and taking more money out of the company in distributions. There are several other tax advantages to C-corporations as well.

Small Business Taxes for S-Corporations

S-corporations are pass-through entities like sole proprietorships and partnerships. This means that each shareholder reports business income and losses on their tax return and profits are taxed at the personal income tax rate. An S-corporation files an informational tax return, called Form 1120S, but the business itself doesn’t pay a corporate tax. This allows an S-corporation to avoid double taxation.

Similar to C-corps, S-corps can also divide business income between salary and dividends. Salary is subject to self-employment taxes, and dividends are not. You can strategically try to save on self-employment taxes by paying yourself a salary. However, the IRS requires you to pay yourself a reasonable salary given your job title, industry, and qualifications. Both C and S-corporations must pay estimated taxes quarterly.

Small Business Taxes for Limited Liability Companies

A limited liability company (LLC) is a business entity that keeps the owners legally separate from the company’s debts or liabilities. As the owner of an LLC, you’ll have the liability protection of a corporation with the tax benefits of a sole proprietorship or partnership.

If you operate an LLC, you’ll be subject to pass-through taxation, just as you would be as a partnership. In other words, you won’t be taxed twice like corporations are. Instead, as an owner of an LLC, you’ll make quarterly tax payments on your income tax forms. On top of that, you’ll also have to submit Form 1065 each year for informational purposes.

LLCs, offer you additional tax flexibility compared to other business entities. From a legal standpoint, you can exist as an LLC. However, from a tax standpoint, you have the option to be taxed as an S-corporation or C-corporation.

When to Pay Small Business Taxes

No matter what type of small business entity you have, you have to pay quarterly estimated taxes if the business owes income taxes of $1,000 or more. Corporations only have to pay quarterly estimated taxes if they expect to owe $500 or more in tax for the year.

Before you owned a business, filing taxes was a one-time thing. But as a small business owner, you’ll have to pay the IRS four times per year. On one hand, that’s four more tax deadlines you might miss. But on the bright side, by the time your yearly tax deadline comes around, you’ll have already paid three-quarters of your tax return.

To make things even more complicated, businesses must deposit federal income tax withheld from employees, federal unemployment taxes, and both employer and employee social security and Medicare taxes. Depositing can be on a semi-weekly or monthly schedule.

Quarterly Estimated Small Business Taxes

To calculate your quarterly payment, estimate your expected adjusted gross income, taxable income, deductions, and tax credits for the year. The best way to gauge these is by just looking at your taxes from the previous year as a guide.

Once you’ve put a number of these figures, you’ll just have to calculate how much you’ll owe in your estimated quarterly small business taxes. The easiest way to do this is to use the IRS’s Form 1040-ES Estimated Tax Worksheet.

These are the deadlines for quarterly estimated small business taxes:

April 15 (covering the period from Jan. 1 to March 31)
June (covering the period from April 1 to May 31)
September (covering the period from June 1 to Aug. 31)
January (covering the period from Sept. 1 to Dec. 31)

Flex Tax and Consulting Group have served and managed all types of tax and revenue collection for the U.S. for more than eight years. Our value-added services and solutions are based on innovative thinking that fits our valuable clients’ needs. If you have any questions, please don’t hesitate to contact us at 415-860-6288 or info@flextcg.com.

The post Business Structures that Start-Up Companies and Small Business Should Know appeared first on Flex Tax and Consulting Group (FTCG).

Starting a business can be very rewarding

It can also be a little overwhelming. From business plans to market strategies, and even tax responsibilities. There are many things to consider. Here are tax tips can help new business owners find success  what new business owners can do to help get off to a good start.

• Choose a business structure. The form of business determines which income tax returns a business taxpayer needs to file. The most common business structures are:
  
  • Sole proprietorship: An unincorporated business owned by an individual. There’s no distinction between the taxpayer and their business.
  • Partnership: An unincorporated business with ownership shared between two or more people.
  • Corporation: Also known as a C corporation. It’s a separate entity owned by shareholders.
  • S Corporation: A corporation that elects to pass corporate income, losses, deductions, and credits through to the shareholders.
  • Limited Liability Company: A business structure allowed by state statute.

 A tax year

A tax year is an annual accounting period for keeping records and reporting income and expenses. A new business owner must choose either:

• • The Calendar year: 12 consecutive months beginning January 1 and ending December 31.
  • Fiscal year: 12 consecutive months ending on the last day of any month except December.
• Apply for an employer identification number. An EIN is also call a federal tax identification number. It’s used to identify a business. Most businesses need an EIN.
• Have all employees complete these forms:
  
  • Form I-9, Employment Eligibility Verification
  • Form W-4, Employee’s Withholding Allowance Certificate
• Pay business taxes. The form of business determines what taxes must be paid and how to pay them.

Taxpayers interested in starting a business can find information for some industries on the Industries/Professions Tax Centers webpage. Each state has additional requirements for starting and operating a business. Prospective business owners should visit their state’s website for info about state requirements.

More information:

• Small Business Admiration’s 10 steps to start your business
• Help You All Flex Tax and Consulting Group 

The post These tax tips can help new business owners find success appeared first on Flex Tax and Consulting Group (FTCG).

Many business owners are pushed into forming their companies in specific states to take advantage of corporate and LLC tax benefits that certain states offer. Entrepreneurs of corporations, for example, are often advised to set up C-corporations in Delaware, while founders looking to set up limited liability companies are often told to do so in Wyoming or Nevada.

But just because other business owners are incorporating or organizing their businesses in these states doesn’t mean you should follow suit. Although Delaware, Wyoming, and Nevada can all be excellent options for incorporating or organizing your business, depending on your goals, there are some situations where doing this would not make sense for business owners. Here are four scenarios where this could be the case.

When Incorporating or Organizing Your Business Outside Your Home State Might Not Be the Right Move

1. You Might Not Avoid Burdensome Incorporation or Organization Procedures in Your Home State

If you’re looking to open a new storefront or office in a state other than the one you initially registered in, chances are you’ll need to follow the same registration processes that you would need to had you incorporated or organized there in the first place. The only difference is that you’d now have to file paperwork to register as a “foreign” business entity—which includes both international businesses and out-of-state U.S. businesses.

Depending on the business you’re registering and the state you’re looking to open a location in, this can mean added costs and hassles. New York, Arizona, and Nebraska, for example, require LLCs to publish notices in news publications for a set period after filing their articles of organization.

Under New York’s rule, if you want your foreign LLC to conduct a business in New York state, you need to run notices in two newspapers—one daily and one weekly—in the county where you plan to have your LLC’s office. These notices must run for six consecutive weeks, starting within 120 days from the date you filed your initial application to do business at the New York Department of State. The county clerk is tasked with selecting the newspapers, but this means that business owners who want to operate in the New York City metro area could be required to run costly notice campaigns in newspapers like the New York Times, the Wall Street Journal, or the New York Post.

Foreign LLCs that fail to do this might not be able to obtain important vendor licenses or have the ability to sue in New York courts. In other words, a New York-based business that plans to file initial articles of organization in Wyoming or Nevada won’t be able to avoid this requirement.

2. You Could Still Face Tax Income Obligations in Other States

In certain parts of the country, out-of-state companies face the same tax consequences that in-state companies do—assuming they both do business in that state. Consider the way California taxes domestic and foreign S-corporations. Under federal law, S-corporations are considered “pass-through entities.” This means that—much like LLCs and partnerships—their income isn’t taxed twice at the organizational and shareholder levels. Having an S-corporation, in theory, is supposed to give owners the ability to leverage the benefits of pass-through taxation without sacrificing the liquidity and deductions that come with being a S-corporation. This is not the case in California. Domestic S-corporations that are incorporated there need to pay a 1.5% tax on their corporate income in addition to taxes on their shareholder dividends and earnings.

Delaware, on the other hand, exempts S-corporations from the 8.7% tax it levies on business that specifically transact within the state. Still, your Delaware-incorporated S-corporation won’t avoid the California S-corp tax—along with the state’s $800 minimum franchise tax—if your business is commercially domiciled in California, or if your sales to California residents exceed the lesser of 25% of your total sales or $500,000 in total sales. Out-of-state LLCs, including Nevada LLCs and Wyoming LLCs, are not immune to California reporting requirements, either. They could be eligible to pay California’s franchise tax and annual LLC fees if they meet certain requirements.

3. You’re Not Interested in Taking Your Company Public

If you’re looking to take on outside investment, chances are that you should incorporate in Delaware. There’s a reason why more than 60% of Fortune 500 companies are incorporated there: Delaware not only offers competitive corporate tax benefits, but a deep body of corporate case law that allows investors, shareholders, and business owners to quickly settle or otherwise resolve business-related disputes.

Creating a Delaware C-corporation also comes with international perks, as well. If you regularly conduct business in Canada, for example, you can use an incorporation strategy known as the “Delaware Straddle” to set up sister Delaware and Canadian corporations consisting of the same shareholders. This structuring tactic allows you to not only leverage Delaware’s tax benefits and case law, but also Canada’s generous government grant programs.

While these may be attractive perks for many companies, pursuing incorporation in Delaware may be an unnecessary step if you’re not looking to become a publicly traded company, entertain outside investments, or service a broad national or international audience.

4. Maintaining a Presence in a Different State Could Be Inconvenient

Even though you’re not required to set up your headquarters or a retail location in the state where you plan to incorporate or organize, you must maintain some sort of physical presence in that state in order to accept service of process in the event of a lawsuit. While working with a registered agent is a relatively affordable way for you to meet this requirement—reputable agents can cost anywhere from $100 to $300 per year—you’ll also likely be responsible for multiple state franchise fees, LLC entity payments, and business entity tax reporting requirements.

Because companies are also considered domiciled for legal purposes in both the state where they’re incorporated and the state where they maintain their principal place of business (which usually is where you’re headquartered), you could also be sued in the state where you’re organized or incorporated. This can raise a broad array of litigation-related headaches if the state where you’re incorporated or organized is far away from the state where you actually have offices and conduct business. In this case, it may make more sense from a logistical perspective to incorporate or organize in your business’s home state instead of filing this paperwork in a different state.

You have likely heard advice that you should incorporate or organize your small business in a state like Delaware, Wyoming, or Nevada. While it’s true that these are good options for many business owners, they might not necessarily be the best move for your business. And there are some cases where incorporating your business outside your home state can actually cause you to face annoying logistical problems or expensive tax consequences. Before making any final decisions on where you organize your small business, it’s worth seeking the advice of an experienced attorney who you trust.

Source: Should You Incorporate or Organize Your Business Outside Your Home State?

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A Limited Liability Company (LLC) is not a separate tax entity like a corporation; instead, it is what the IRS calls a “pass-through entity,” like a partnership or sole proprietorship.

All of the profits and losses of the LLC “pass through” the business to the LLC owners (called members), who report this information on their personal tax returns. The LLC itself does not pay federal income taxes, but some states do charge the LLC itself a tax. Flex Tax and Consulting Group is going to demonstrate what are those.

Income taxes

The IRS treats your LLC like a sole proprietorship or a partnership, depending on the number of members in your LLC. If you’ve already done business as a sole proprietorship or partnership, you’re ahead of the game because you know many of the rules already. If not, here are the basics:

Single-owner LLCs

The IRS treats one-member LLCs as sole proprietorships for tax purposes. This means that the LLC itself does not pay taxes and does not have to file a return with the IRS.

As the sole owner of your LLC, you must report all profits (or losses) of the LLC on Schedule C and submit it with your 1040 tax return. Even if you leave profits in the company’s bank account at the end of the year—for instance, to cover future expenses or expand the business—you must pay taxes on that money.

Multi-owner LLCs

The IRS treats co-owned LLCs as partnerships for tax purposes. Co-owned LLCs themselves do not pay taxes on business income; instead, the LLC owners each pay taxes on their lawful share of the profits on their personal income tax returns (with Schedule E attached). Each LLC member’s share of profits and losses, called a distributive share, set out in the LLC operating agreement.

Most operating agreements provide that a member’s distributive share is in proportion to his percentage interest in the business. For instance, if Jimmy owns 60% of the LLC, and Luana owns the other 40%, Jimmy will be entitled to 60% of the LLC’s profits and losses, and Luana will entitle to 40%. If you’d like to split up profits and losses in a way that is not proportionate to the members’ percentage interests in the business, it’s called a “special allocation,” and you must carefully follow IRS rules.

LLCs can elect corporate taxation

If your LLC will regularly need to retain a significant amount of profits in the company, you (and your co-owners, if you have any) may be able to save money by electing to have your LLC taxed as a corporation.

Estimating and paying income taxes

Because LLC members are not consider employees of the LLC, but rather self-employed business owners, they are not subject to tax withholding. Instead, each LLC member is responsible for setting aside enough money to pay taxes on his/her share of the profits. The members must estimate the amount of tax they’ll owe for the year and make payments to the IRS (and usually to the appropriate state tax agency) each quarter—in April, June, September and January.

Self-employment taxes

Because, again, LLC members are not employees but self-employed business owners, contributions to the Social Security and Medicare systems (collectively called the “self-employment” tax) are not withheld from their paychecks. Instead, most LLC owners required to pay the self-employment tax directly to the IRS.

Expenses and deductions

As you no doubt already know, you don’t have to pay taxes—income taxes or self-employment taxes—on money that your business spends in pursuit of profit. You can deduct (“write off”) your legitimate business expenses from your business income, which can greatly lower the profits you must report to the IRS. Deductible expenses include start-up costs, automobile, travel and entertainment expenses and advertising and promotion costs.

State taxes and fees

Most states tax LLC profits the same way the IRS does: The LLC owners pay taxes to the state on their personal returns; the LLC itself does not pay a state tax. A few states, however, do charge the LLC a tax based on the amount of income the LLC makes, in addition to the income tax its owners pay. For instance, California levies a tax on LLCs that make over $250,000 per year; the tax ranges from about $1,000 to $9,000.

In addition, some states (including California, Delaware, Illinois, Massachusetts, New Hampshire, Pennsylvania and Wyoming) impose an annual fee on LLCs, called a ” franchise tax,” an “annual registration fee” or a “renewal fee.” In most states, the fee is about $100, but California exacts a hefty $800 fee per year from LLCs, and Illinois, Massachusetts and Pennsylvania charge $300, $500 and $330, respectively. Before forming an LLC, find out if your state charges a separate LLC-level tax by visiting the website of your state’s Revenue or Tax Department, or by giving them a call.

Can corporate taxation cut your LLC tax bill?

If you regularly need to keep a substantial amount of profits in your LLC (called “retained earnings”), you might benefit from electing corporate taxation. Any LLC can treat like a corporation for tax purposes by filing IRS Form 8832 and checking the corporate tax treatment box on the form.

After making this election, profits kept in the LLC are taxed at the separate income tax rates that apply to corporations; the owners don’t pay personal income taxes on profits left in the company. (Unlike an LLC, a corporation pays its own taxes on all corporate profits left in the business.) Because the corporate income tax rates for the first $75,000 of corporate taxable income are lower than the individual income tax rates that apply to most LLC owners, this can save you and your co-owners money in overall taxes.

Source: https://articles.bplans.com/how-limited-liability-companies-llcs-are-taxed/

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